America First…but not in Equities
President Trump’s ‘America First’ policies have added excessive hope to the US equity market, as
we wrote last week in Trouble in America. With downside risk to the S&P500 we do not think
Europe will directionally decouple, but we do see an appealing relative trade.
Margin pressures easier, Valuation kinder
Unlike the US, European earnings have little in the way of headwinds from wage inflation, FX or
finance costs, and margins remain unstretched. Valuations also demand far less in terms of
delivery, balance sheets have more flexibility (incl. for M&A) and Europe is more pro-reflation.
Stratometer – favourable for Europe
We revisit our Stratometer scorecard. While less positive for the US, the interplay of financial
conditions, economic growth momentum and political risk bodes better for Europe
Play margin stories, value, domestic demand and political risk
To implement our ‘long Europe’ call we look for margin upside at a reasonable price and/or with
domestic demand exposure. We also seek to capitalise on overplayed political risk.
Sectors: Upgrade Utilities & Construction, Downgrade Media & Financial Services
Banks and Insurers remain a core overweight for us and it’s too early to buy back the Staples. But
in Utilities and Media we find misperceptions on reflation sensitivities as an opportunity to change
tack. Construction moves back to overweight on domestic demand leverage, as we also move the
more structurally challenged Financial Services to Underweight.
Top picks in Eurozone Equities
We also highlight 12 top picks in Eurozone equities: ISP, SocGen, Iberdrola, St Gobain, Randstad,
Orange, Merlin, Volkswagen, STMicro, Carrefour, Airbus and Allianz.